Shopify books fifth straight net profit as strategy of backing partner companies delivers another windfall gain - The Globe and Mail

Shopify CEO Tobi Lutke at the company's Montreal office, on Feb. 18, 2015.

Paul Chiasson/The Canadian Press

Shopify Inc. reported its fifth straight profitable quarter Wednesday, capitalizing on a recent strategy to use its clout to take a bigger bite out of the huge spinoff value it has created for ecommerce service providers. The Ottawa-based ecommerce software provider also topped US$1-billion in quarterly revenue for the first time as it continued to benefit from a pandemic-fueled surge in online shopping.

Canada’s most valuable company, which prior to the pandemic had rarely reported a profitable quarter since its May 2015 initial public offering, earned a second quarter net profit of US$879.1-million, or US$6.90 per share, on sales of US$1.12-billion, and earned adjusted net income of US$2.24 per share. The company posted revenue of US$714.3-million and a slim US$36-million profit in the same period a year ago.

Analysts had warned early this year that the company, which provides an online software platform for merchants to run both their ecommerce stores and back-office operations, would struggle to repeat its huge growth pace of the past year as shoppers shifted en masse to online commerce during the pandemic. But they had recently backtracked from that view and upped their targets, predicting, on average, that Shopify’s revenue would hit US$1.04 billion in the quarter and that the company would earn adjusted earnings of US96 cents per share, the key bottom line measure they watch.

The company instead more than doubled that, earning $2.24 per share on an adjusted basis. Shopify booked $334.2-million in revenue from its core subscription fee charged to merchants to use its platform, up 70 per cent year over year, while revenue from fees charged for other services on the platform including payments processing was US$785.2-million. Total sales by merchants over Shopify reached US$42.2-billion, up 40 per cent year over year.

The company also in the second quarter launched a series of initiatives to broaden its reach into the ecommerce landscape, including announcing its Shop Pay ecommerce checkout service will be available to all merchants in the U.S. selling on Facebook and Google even if they don’t use Shopify’s core platform.

“Shopify fired on all cylinders in our second quarter, keeping our merchants well equipped to seize the opportunities presented in a post-pandemic retail era,” chief financial officer Amy Shapero said in a release.

But the company, which withdrew its financial guidance at the onset of the pandemic, is still not providing specific estimates of expected revenues and earnings. However, the company said Wednesday it expects its full year adjusted operating income to top the US491.3-million it earned in 2020.

Shopify has consistently beaten analyst estimates since going public, and markedly so since the pandemic. But more recently it has also capitalized on the value created by service providers that sell a range of services to its merchants through its app store, which themselves have grown into large companies that have raised significant venture capital financings and even gone public at multi-billion dollar valuation.

For the second quarter in a row, Shopify’s bottom line was sweetened by a shrewd strategy that has seen it invest in digital companies that sell services through its app store to the company’s 1.75-million-plus merchants. In April, Shopify struck a deal with Global-E Online Ltd., an Israeli company that helps online merchants conduct cross-border sales in the native language and currencies of their consumers globally. Shopify agreed to make Global-E its exclusive outside provider, for at least three years, of cross-border solutions for its merchants in return for an undisclosed volume-based fee on transactions it processes for Shopify merchants – plus warrants to buy 7.75 million shares for one penny a share, and another 11.85 million in the following two years.

Global-E went public a month later at US$25 a share and closed the quarter at US$57.08 apiece, creating a significant windfall for Shopify based on the value of its securities received in the partnership deal. That contributed an unrealized gain of US$814.6-million in the quarter, accounting for most of its net income. That compared to Shopify’s operating income of US$139.4-million in the quarter.

Shopify recorded an even larger gain in the first quarter on its stake in ecommerce consumer financing provider Affirm Holdings Inc., picked up in a similar deal, after the San Francisco company went public early in the year. That gain accounted for substantially all of Shopify’s US$1.3-billion profit in the first quarter, an amount that eclipsed the size of its revenues for that period.

Shopify, which also invested US$375-million in its payments processing partner Stripe, Inc. in the first half of the year and has backed several other service providers to its merchants, now values those investments in its partners at US$2.8-billion, accounting for 23.4 per cent of its total assets.

Richard Tse, an analyst with National Bank Financial who had recently upped his price target on Shopify stock to US$2,000 from US$1,650, said in an e-mail the company’s results “were very strong. What was most surprising was the level of profitability which was well above expectations. While a large part of that is due to investment gains, it shows the breadth and potential operating leverage in their model that’s building with scale – this includes investments where they have an advantageous vantage point. Bottom line, there’s still a lot of runway.”

The company also tipped that it is preparing to return to public markets again to capitalize on its share price, which has recently hit record levels as its market capitalization nears the US$200-billion mark. Late Tuesday, Shopify issued a base shelf prospectus to raise up to US$10-billion in shares, debt and other securities in the 25 month period starting Aug 6. Shopify typically prefers to sell securities via overnight marketed block trades following strong earnings reports.

Shopify stock was up 1 per cent in premarket trading.

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Shopify books fifth straight net profit as strategy of backing partner companies delivers another windfall gain - The Globe and Mail
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